Is COSCO SHIPPING Holdings Co., Ltd.'s (HKG:1919) Stock's Recent Performance Being Led By Its Attractive Financial Prospects?

COSCO SHIPPING Holdings' (HKG:1919) stock is up by a considerable 58% over the past three months. Given that the market rewards strong financials in the long-term, we wonder if that is the case in this instance. In this article, we decided to focus on COSCO SHIPPING Holdings' ROE.

Return on Equity or ROE is a test of how effectively a company is growing its value and managing investors’ money. In simpler terms, it measures the profitability of a company in relation to shareholder's equity.

View our latest analysis for COSCO SHIPPING Holdings

How To Calculate Return On Equity?

The formula for ROE is:

Return on Equity = Net Profit (from continuing operations) ÷ Shareholders' Equity

So, based on the above formula, the ROE for COSCO SHIPPING Holdings is:

11% = CN¥27b ÷ CN¥250b (Based on the trailing twelve months to March 2024).

The 'return' is the income the business earned over the last year. Another way to think of that is that for every HK$1 worth of equity, the company was able to earn HK$0.11 in profit.

What Has ROE Got To Do With Earnings Growth?

So far, we've learned that ROE is a measure of a company's profitability. Based on how much of its profits the company chooses to reinvest or "retain", we are then able to evaluate a company's future ability to generate profits. Assuming everything else remains unchanged, the higher the ROE and profit retention, the higher the growth rate of a company compared to companies that don't necessarily bear these characteristics.

COSCO SHIPPING Holdings' Earnings Growth And 11% ROE

To begin with, COSCO SHIPPING Holdings seems to have a respectable ROE. Especially when compared to the industry average of 8.6% the company's ROE looks pretty impressive. This probably laid the ground for COSCO SHIPPING Holdings' significant 34% net income growth seen over the past five years. However, there could also be other causes behind this growth. For example, it is possible that the company's management has made some good strategic decisions, or that the company has a low payout ratio.

As a next step, we compared COSCO SHIPPING Holdings' net income growth with the industry, and pleasingly, we found that the growth seen by the company is higher than the average industry growth of 25%.

The basis for attaching value to a company is, to a great extent, tied to its earnings growth. What investors need to determine next is if the expected earnings growth, or the lack of it, is already built into the share price. This then helps them determine if the stock is placed for a bright or bleak future. What is 1919 worth today? The intrinsic value infographic in our free research report helps visualize whether 1919 is currently mispriced by the market.

Is COSCO SHIPPING Holdings Using Its Retained Earnings Effectively?

COSCO SHIPPING Holdings' three-year median payout ratio is a pretty moderate 50%, meaning the company retains 50% of its income. By the looks of it, the dividend is well covered and COSCO SHIPPING Holdings is reinvesting its profits efficiently as evidenced by its exceptional growth which we discussed above.

While COSCO SHIPPING Holdings has seen growth in its earnings, it only recently started to pay a dividend. It is most likely that the company decided to impress new and existing shareholders with a dividend. Based on the latest analysts' estimates, we found that the company's future payout ratio over the next three years is expected to hold steady at 52%. However, COSCO SHIPPING Holdings' future ROE is expected to decline to 8.3% despite there being not much change anticipated in the company's payout ratio.

Conclusion

In total, we are pretty happy with COSCO SHIPPING Holdings' performance. Specifically, we like that the company is reinvesting a huge chunk of its profits at a high rate of return. This of course has caused the company to see substantial growth in its earnings. Having said that, on studying current analyst estimates, we were concerned to see that while the company has grown its earnings in the past, analysts expect its earnings to shrink in the future. Are these analysts expectations based on the broad expectations for the industry, or on the company's fundamentals? Click here to be taken to our analyst's forecasts page for the company.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

Have feedback on this article? Concerned about the content? Get in touch with us directly. Alternatively, email editorial-team@simplywallst.com